Monday, January 13, 2014

Two points on inequality

I've stayed out of the inequality - minimum wage business, largely because it strikes me as mostly political posturing rather than serious policy or economics.

A few small points from the blogosphere struck me as interesting enough to pass on, and indicative of that conclusion.

David Henderson, "Minimium Wage not Well Targeted at Reducing Poverty" makes that rather obvious point. How much would raising the minimum wage change the US Gini coefficient, even if it had no employment effects? Not much, obviously, if you think about it just for a moment, and even less when you look at who actually works at minimum wage jobs. Quoting Joseph J. Sabia and Richard V. Burkhauser,

Only 11.3 percent of workers who would gain from the increase live in households officially defined as poor.

A whopping 63.2 percent of workers who would gain were second or even third earners living in households with incomes equal to twice the poverty line or more.

Some 42.3 percent of workers who would gain were second or even third earners who live in households that have incomes equal to three times the poverty line or more.

That brings minimum wage hikes into the land of answers in search of a question. If you seriously want to make a dent in the US Gini coefficient, and spend a year of your Presidency doing it, fiddling with miniumum wages is just an insignificant policy. We might as well fight about raising taxi fares.

John Goodman "In defense of inequality" takes the goal of less inequality within the US seriously. OK, if inequality in the US is the problem, what is the logical consequence? John notes we now tax wealthy people who want to leave but

...when a wealthy person expatriates, the distribution of income and wealth becomes more equal. Should we reverse course and encourage the John Templetons of this world to get out of town. If equality is a serious goal, we should at least relax the penalties.

At the other end of the income ladder, consider poor immigrants. Every time one comes to our shore, the distribution of income [within the US] becomes more unequal. But the same could be said if the immigrant is rich. Any immigrant who isn’t earning close to the average income is going to make the distribution less equal as a result of his immigration. If equality is a serious goal, we definitely need a different immigration policy.

This strikes me as a longstanding sore spot in the redistributionist agenda. If you worry about inequality, why worry only about inequality within the US, and not across national borders? Of course, if you worry about cross country inequality and want to address it with redistribution, the US as a whole, even poor people here, should be sending boats full of money (and goods) to, say, Bangladesh. But I agree with John

...before we rush out and change all these laws let’s stop and reconsider. If inequality is a bad thing, there must be victims. Yet if penniless immigrants come to our shore, knowing that their arrival makes the distribution of income more unequal than it was and knowing that they will be at the bottom of the income ladder initially, then it’s hard to argue they are being victimized.

John again:

Then there is federal aid to the students at Harvard. Granted, many of them may be poor right now. But if they were smart enough to get into Harvard, their lifetime expected earnings are way above average. And what’s true of Harvard is true of Yale, Princeton, etc. In fact, an argument can be made that all aid to college students everywhere contributes to inequality. If equality is a goal, at least there should be a lot less of it.

Yes. Our government does a huge amount of redistribution and a whole lot of it goes to very well off people.

Lotteries and gambling by their nature create inequality.

it’s hard to think of an institution that causes more inequality than the lottery, even though lotteries are a favorite source of funds for Democratic legislatures and Democratic governors.

The natural conclusion is that significantly reducing pretax within-US income inequality isn't really the goal of people advocating higher minimum wages. I'm not clear what the goal is (except maybe to get us all to fight about something other than each week's ACA horror story.)

"Marriage inequality" should be at the center of any discussion of why some Americans prosper and others don't....among families headed by two married parents in 2012, just 7.5% lived in poverty. By contrast, when families are headed by a single mother the poverty level jumps to 33.9%... among white married couples, the poverty rate in 2009 was just 3.2%; for white nonmarried families, the rate was 22%. Among black married couples, the poverty rate was only 7%, but the rate for non-married black families was 35.6%.

(See original for sources.) One may object about correlation and causation here, but the fact that non-marriage and poverty go hand in hand is surely worth thinking about. And it's doubly tragic for children.

... the number of children raised in female-headed families is growing throughout America.... 28.6% of children born to a white mother were out of wedlock. For Hispanics, the figure was 52.5% and for African-Americans 72.3%. In 1964, when the war on poverty began, almost everyone was born in a family with two married parents: only 7% were not.

For children, the problem begins the day they are born, and no government can redistribute enough money to fix it.

The problem is not teenagers. This is a choice made by adults.

The majority of women who have children outside of marriage today are adult women in their 20s. (Teenagers under 18 represent less than 8% of out-of-wedlock births.)

Ari concludes

One of the differences between the haves and the have-nots is that the haves tend to marry and give birth, in that order. .... A better and more compassionate policy to fight income inequality would be helping the poor realize that the most important decision they can make is to stay in school, get married and have children—in that order.

This is the elephant in the room, and interesting that one is not allowed to mention it in polite society.

The debate on the apparent ineffectiveness of the war on poverty comes down to this: Did single parenthood among poor people increase of its own, for mysterious social reasons, and only massive money from the government is keeping people from otherwise inevitable destitution? Or did the vast increase in the welfare state contribute to the pathology that now it needs to fix?

Goodman was pretty clearly of the latter view. Fleisher leans to the former, but really fell short on why this happened, and "helping the poor to realize" is pretty hopeless as a policy prescription. They poor are smart, and huge single parenthood rates do not happen because people are just too dumb to realize the consequences, which the see all around them.

From the left, I hear nothing but deafening silence on this correlation.

Meanwhile, the Bureau of Labor Statistics reminds us again of why pretax income distributions widened:

Inequality comes from lack of marriage and education. It is not obviously a problem per se, but it is a symptom of social and economic dysfunction. Single-parenthood rates over 50% are a sign of a society in deep trouble.

Raising the minimum wage is then less than a band-aid for the symptoms of a heart-attack sized problem. But why then is the minimum wage so high on the chattering-class agenda?

36 comments:

the US as a whole, even poor people here, should be sending boats full of money (and goods) to, say, Bangladesh..

we are... well, not maybe bangladesh, but just add up aid to other countries (who send us aid?),military cover (who pays us for that?), businesses exported that train other countries people and transfer IP, and on and on...

all of that is redistributionist... as a programmer in research computing, i have watched them deny expertise here all the time till now the argument is as perennial and unchanging as the 73 cents on a dollar women make (an admitted wrong number that no one questions).

its such an easy sell as it fits the idea of international socialism, redistributing the wealth and expertise of the US to other countries, like China. (who just tested a new hypersonic weapon the past few days and have been making interesting assertions as to the senkaku's. when push comes to shove, will the US side with China or Japan (against china?))

the effort we put in to stop the theft of intellectual property from the places were we develop it is very low (with most faculty not believing it is an issue unlike businesses, many who DO take it very seriously).

100 billion in aid... then how many missing truckloads of cash during the war? this link discusses a missing 6.6 billion: http://articles.latimes.com/2011/jun/13/world/la-fg-missing-billions-20110613

and if you think of economic breaks, like weights on one entry in a race, vs other entrants, then you can see all manner of other policies as ultimately redistributional, like our abysmal education system that cant get back to the superior thing it was and gets worse and worse the more its fixed (with a creepy history that puts james bond to shame - know of bela dodd?)

redistribution is usually only thought of in the classical way...

just as most people would use a bank or money company to exchange cash, and not a hawala.

Redistributionists figured the more abstract it was, rather than black and white blatant, the less resistance there was to any of it, and the easier it was to negate the question.

Just as the erudite can rethink abortion from eugenics to social good (given its full history)... its not hard to change a lesser perspective. Overtime, parasites evolve to avoid detection and ejection by a host, one just changes the hosts perspective

but note in bad times, welfare and aid to other places do not get shorn before police, fire, and schools... heck, some are not even on the table to be noticed...

estimates of how much? well, bigger than the local social welfare state, and that was 20 trillion since FDR, no?

a lot more than any one pays much attention toeven less are those that understand things like compound interest and investment and then try to consider what that drain could potentially cost in today's place in advancing society and where invention and knowledge could be if asymmetry was allowed. (one only has to think of what would have happened to the industrial revolution if the west decided to forgoe the economics behind that till other countries, who have yet to catch up, had caught up). before cringing in horror, it was the asymmetry of western medicine that then went to places that would have none, even if what went was never enough, it was more than nothing. still is if you ever ride a bus and see the ads to help them fix kids hairlips.

This is the elephant in the room, and interesting that one is not allowed to mention it in polite (progressive) society.

“To learn who rules over you, simply find out who you are not allowed to criticize.”― Voltaire

pretty clear litmus...

might be why welfare required dad to get the heck out. i grew up in one of those poor inner city places, and watched how such requirements that went with help created the situation that we cant talk about to reverse. kind of like a latch, it goes forwards, but it cant slip back.

the germans had a word for that: gleichschaltung

When you mix everything thing up, maximizing diversity, you get homogeneity.

and if your wondering how the powerless are the ones with power (enough to keep people from talking freely), just understand concepts like "topping from the bottom".

id single parenthood among poor people increase of its own, for mysterious social reasons, and only massive money from the government is keeping people from otherwise inevitable destitution? Or did the vast increase in the welfare state contribute to the pathology that now it needs to fix?

duh... just read the welfare applications and requirements... mostly single women today... and note the other progressive feminist stuff from the leaders. heck, we forget groups like rote zora, women like bela dodd, and openly stated goals of the leaders.

I could literally fill up pages and pages ranging from 1850s moses harmon and his papers, to modern day leaders, all stating that their goal is the outcome that your asking a question to!

"No woman should be authorized to stay at home and raise her children. Society should be totally different. Women should not have that choice, precisely because if there is such a choice, too many women will make that one." -- Interview with Simone de Beauvoir, "Sex, Society, and the Female Dilemma," Saturday Review, June 14, 1975, p.18

"Since marriage constitutes slavery for women, it is clear that the Women's Movement must concentrate on attacking this institution. Freedom for women cannot be won without the abolition of marriage." -- Sheila Cronan, "Marriage," in Koedt, Levine, and Rapone, eds., Radical Feminism, p. 219

not to mention the move towards homosexuality as the dominant (and less procreative) norm

"Heterosexuality is a die-hard custom through which male-supremacist institutions insure their own perpetuity and control over us. Women are kept, maintained and contained through terror, violence, and the spray of semen...[Lesbianism is] an ideological, political and philosophical means of liberation of all women from heterosexual tyranny... " -- Cheryl Clarke, "Lesbianism, An Act of Resistance," in This Bridge Called My Back: Writing by Radical Women of Color

unless your answer will include tons of articles in magazines, required studies courses which you cant question the thesis or ideas... state policies in grants... the list goes on..

and millions of dollars a year into it, and you cant question any part of it... bringing us full around and back to Voltaire

It is clear that you have avoided the inequality conversation - after all, you do not seem to have a clue of what that talk is about. It is not about single mothers, but about the relative decline in the earning power of the working class (even the church going, law-abiding, married ones) and the shrinking experience with social mobility in America. Those are not made up problems.

Having said that, the article you linked to is really bad - I mean so stupid it hurts bad.

It sounds like what you are referring to is Income Mobility and whether or not that is a problem can depend upon whether your looking at groups defined by income level or actual people. Mark Perry has a recent piece over at Carpe Diem

This report is incorrect. The authors are trying to claim that a lot of switching quintiles proves we have a lot of mobility. What they fail to do is check to see which switches occur. What we find is that the top people in one quintile fairly regularly switch to the bottom of the next quintile up and vice versa. Households earning $1,100,000 one year might only make $900,000 the next year. But do we ever see them drop to $50,000? That would be income mobility! Do we see that? No. And we don't see a lot of people catapulting over a quintile and going from say the 4th quintile to the 2nd quintile. Instead, the increases in income and wealth go disproportionately to the top .1%, with some gains to the top 1% and even the top quintile. It isn't social mobility to go from the very top of the 4th quintile to the very bottom of the 3rd quintile.

If you worry about inequality, why worry only about inequality within the US, and not across national borders?

Why not worry about both?

I think a problem with those that have only had economics educations is so much time is spent explaining theories that have their origins in Classical English PE (eg. Marshall, Ricardo, etc) with little time to consider that there may be other ways of looking at the world.

People like Myrdal or Marx may not be any more right than Smith or Sargent, but they give you another model to look at as a reference point. Then you look at the history and the data and let that speak for itself (not go out looking to prove one model or another.)

For example, large movements of workers can have deflationary impacts. A good example is what happens when China intermittently losens restrictions inter-regional labour movements. Another good example are large movements of people that occurred in interwar Europe. Prices rise (for houses, commodities), but wages did not due to intense competition. Capital in such situations became concentrated on certain members of the asset owning class. Extreme deflationary conditions made recovery in the corporate sector problematic. In such circumstances Keynesian policies, by disbursing government funds made some sense. A reasonable income level can be important to get the private sector going, as well as for a reasonable tax base.

Foreign aid policies to assist in the distribution of wealth across countries are also a good thing, both for moral reasons, and to get growth kick started in certain countries in an economic/political catch 22. Thank goodness the US had such sense with its Marshall Plan after WWII. Without that the world would be a very different place.

If it is truly about a minimum standard of living, why use the ragged cudgel of the minimum wage to achieve it? The deletrious, second-round effects of the minimum wage on teenagers, for example, are well-documented.

The best social program is to increase employment, yet the governments everywhere seem hellbent on making it more expensive and risky to hire people.

Haven't said anything about minimum wage ... first point: professor Cochrane is trying to dismiss something serious with an argumentation that isn't remotely connected with the subject.

His point (not from this post, but from past ones) is something like "how much the 0.1% earn is not on the utility function of the 47%, so unless there is envy in their utility function, the inequality doesn't matter).

My first point, described below by Jefftopia, is that it does matter. The inequality is leading to a lack of generation and intergeneration mobility, and the son of the poor is not going to compete with the son of the rich - poor parents should not be a factor in someones fate.

In my point of view, professor Cochrane is defending the most anti-liberal agenda that is out there.

My second point: I don't know if raising the minimum wage is the solution, but no one should be deprived of the basics, no matter what, for humanitarian reasons. If it's by redistribution, or with politics aimed at creating more jobs, doesn't matter.

"Deprived" is a word that belies your intentions. No one is "depriving" the poor of their basics. Income "equality" is a dopey goal, and the notion that the 1% are somehow keeping the 99% down is just as dopey. The only way to achieve income equality is for everyone to be equally poor. Income inequality is a sign or a meritorious system where risk is rewarded and innovation results in wealth. These are desirable qualities in a society. Look around at places where those two conditions don't exist and let me know if that is how you want our society to look [Greece comes to mind: Work! Or don't! Doesn't matter, you get a check either way!!]

I think I'm one of the few self-described "liberals" that believes minimum wage is a clearly inferior method for redistribution, and that if we're serious, we'd rely more on programs like EITC, would implement consumption taxes, and remove nonsensical tax policy like the mortgage-interest deductions, etc. Furthermore, deviating from my fellow liberals, I do not believe inequality is in and of itself a problem, but as John pointed out, a symptom of social trouble.

That said, I have a few quips with this post. Even if inequality isn't itself a problem, a lack of intergenerational income mobility and a lack of real economic gains to the middle class *is* a problem. Do we really want a rentier-debtor society? No, we don't. It contributes to financial instability. It leads to socially undesirable health outcomes. It flies in the face of our notions of justice, fairness, and equality of opportunity and so on.

Regarding that last graph, yes, returns to a bachelor's is great, but let's be careful: plenty of bachelor's can't get jobs. Meanwhile, highly sought-after trade skills are soaring in value while social stigma stifles interest in the field. We don't need more college students, we need a society with skill sets. It's also worth noting that education generates positive externalities.

Very well said. I hope you represent an otherwise silent majority of non hysterical people "of the left" (like myself) who suspect that rising inequality reflects a more unequal distribution of opportunities, and hence may warrant our collective attention--but through the tools you mention, especially education and eitc. Notice that Europe redistributes a lot, but does use consumption taxes far more than we do.

I agree that single parenthood is a huge problem. Not sure if it is a cause or a consequence of other problems. Discouraging out of wedlock births should be a priority and yet the right spends a lot of time and energy fighting against contraception and abortion. The right apparently loves poor fetuses but hates poor children. Go figure.

American voters have an absolute right to be concerned about inequality in America and to not care very much about inequality in far away places. American citizenship belongs to all Americans equally and yet a small percentage are managing to seize for themselves a disproportionate part of the collective benefit.

U.S. citizenship is arbitrary and outside anyone's control for a huge majority of Americans. A common argument for redistribution rests a lack of equal opportunity because circumstances beyond a person's control determine outcomes, e.g., being born into a poor family cripples that person's chance at climbing the social ladder.

So, as you can see, along that line of argumentation, there really is no morally compelling reason to favor fellow citizens over non-citizens. It's lines on a map.

It's not that the right 'hates poor children' but that people on the right don't think the answer to every problem is yet another government program that costs too much and delivers too little (see, for example, the Chicago Public School system).

Anonymous - fine, what policies do the right propose that are not just exhortations to the poor to either better themselves or die? The right seems to be perfectly content to support grossly inefficient and wasteful government policies that favor the wealthy (agricultural subsidies and military procurement for example).

Jefftopia - I do not accept your line of argument so I do not accept your conclusion. If you truly feel that you have no more moral obligation to the children down the block than you do to children in Bangladesh; that you have no more personal stake in the well being of your neighbors than in that of complete strangers on the other side of the world, your attitude is threat to your own emotional well being and the well being of America. I expect that if one tested self proclaimed libertarians they would tend to score very high on alienation.

Second, "a threat to your own emotional well being" is obviously false if giving equally to Americans and Bangladeshi generates greater utility for myself than weighting Americans in giving.

Third, even if my position is a threat to America's "emotional well being" you haven't given a reason for prioritizing America's "emotional well being" over any other country's.

Fourth, and last, You are assuming that my neighbor is *not* a stranger. The point is my argument is that a stranger is a stranger, all should be equally worthy of aid, regardless of nationality, location, etc. I'm *not* claiming that we should treat people we know the same as strangers - but I'm not sure I can justify that position.

You made the point in an earlier McDonald's post that the minimum wage hurts people--they are priced out of the activity which instills discipline, responsibility, and yes, creativity, namely work. That's the most terrible part of the minimum wage. Current discussion is just trivial.

Will Wilkinson wrote a great piece (http://object.cato.org/sites/cato.org/files/pubs/pdf/pa640.pdf) in 2009 on some of the significant problems with using inequality measure of societal well-being. I mention it here because this blog has been a consistent source of excellent insights and I found Will's piece to have the same. It is well worth the time to read.

I agree. The left pushes for higher minimum wage and at the same time longer unemployment insurance because there aren't enough jobs. But raising the minimum wage, if anything, will result in fewer jobs.Its all political posturing.

Thomas Nagel makes a good argument for why concentrating on inequality within a nation's borders is justified here: http://philosophyfaculty.ucsd.edu/FACULTY/RARNESON/NAGELglobaljustice.pdf

His basic argument is that we are obligated to help the poor in the US because we collectively impose legal institutions on them. If we are going to require that people follow laws (and throw them in cages if they refuse), then we owe it to them to provide as fair of a society as possible.

Why no mention of the relative decline of middle class incomes, and the concentration of wealth in fewer hands? The welfare queen straw man is not the main source of inequality, it's the transfer of wealth from the middle class to the ultra high end.

Extra points for creativity in claiming that helping poor people get rich by funding their Harvard tuition increases inequality. If Harvard only graduated well-off students it would be more equal.

Foreign aid of all kinds is wealth distribution, wealth distribution doesn't work, and anglosphere countries should grow out of aid and white guilt concepts anyway.

Countries that let a literal flood of aliens in every year, and all anglosphere countries do, are already supporting parasitic communities of every kind of foreigner, much to our detriment. That's welfare enough for the barbarians whose homelands contribute NOTHING to the advance of civilisation.

I know somewhat off topic, but here is something interesting by Scott Sumner expressing bewilderment why conservatives find it so hard to believe in aggregate demand http://www.themoneyillusion.com/?p=25938

"aggregate demand" is a pretty slippery concept. You demand less of one good if you demand more of another. But how do we demand less of everything? Most "aggregate demand" models are missing a budget constraint. When they do put in a budget constraint, we demand less of everything by demanding more money. That, at least makes sense.

Anyway, Surely something like "aggregate demand" is at stake in turnining a financial crisis into a sharp downturn. The puzzle is why it goes on and on. Sumner's graph is very misleading -- compare his IP to the previous trend or "potential." Perennial slow growth sounds a lot more like "supply." And Mulligan type problems, though slow moving, do suggest an economy that recovers much more slowly from shocks. More later -J

This only works if there is someone else willing to invest those savings, since savings and investment must be equal by definition. If planned investment is less than planned savings, the accounting identity will force additional investment to take the form of building up inventories and aggregate savings to fall by reducing GDP - voila decreased aggregate demand.

Once in the depression the fastest way out is increasing demand via the only factors available to policy - increase G. The economy will probably recover on its own, but that is the long, hard, slow way.

My own reply to this thread: Fighting talk: http://theredbanker.blogspot.com/2014/01/can-john-cochrane-be-saved.html

On AD: Sorry but I don't even get your objection. How can we consume less of everything? By spending less? And when that spending was financed by debt, that means we're even consuming less of financial products? What's so hard to understand?

"Avoiding long-term poverty is not rocket science. First, graduate from high school. Second, get married before you have children, and stay married. Third, work at any kind of job, even one that starts out paying the minimum wage. And, finally, avoid engaging in criminal behavior. If you graduate from high school today with a B or C average, in most places in our country there's a low-cost or financially assisted post-high-school education program available to increase your skills."

And make sure that you have good schools in your neighborhood to graduate from (oops that is hard to do if your parents are super poor).

And make sure that you and your father or other family breadwinner are never arrested for the crime of Driving While Black or Walking While Black, and don't risk getting suspended from school for Celebrating While Black! That could really hurt your chances of maintaining subsistence living standards for generations.

I think there's no causality relationship between marriage and poverty but there's a role for marriage to play as moderating variable. What Ari wrote and you cautiously backed-up is a classical definition of how a moderating variable works. When you introduce marriage you get stronger correlation but it does not necessarily mean it causes something or is an effect of another thing.

Thanks to a few abusers I am now moderating comments. I welcome thoughtful disagreement. I will block comments with insulting or abusive language. I'm also blocking totally inane comments. Try to make some sense. I am much more likely to allow critical comments if you have the honesty and courage to use your real name.

About Me and This Blog

This is a blog of news, views, and commentary, from a humorous free-market point of view. After one too many rants at the dinner table, my kids called me "the grumpy economist," and hence this blog and its title.
In real life I'm a Senior Fellow of the Hoover Institution at Stanford. I was formerly a professor at the University of Chicago Booth School of Business. I'm also an adjunct scholar of the Cato Institute. I'm not really grumpy by the way!